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Introduction

A Tale of Two Plots

Consider the graph in Figure I.1. This shows seven years of monthly returns1 for stocks in the S&P 500 index. Each dashed line denotes an individual stock’s return series. Their weighted average—the value of the S&P 500—is marked with a bold black line. The thin black line shows returns on three-month U.S. treasury bills.

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FIGURE I.1: A fancy plot: monthly stock returns for members of the S&P 500 and their average (the bold line). What can you learn?

This is a fancy plot. It looks cool, with lots of different lines. ...

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